Don't be short

Marcus Padley

Marcus Today

The Blue Wave chatter has morphed this week into a new phrase in the newswires - A “Democratic Sweep”. This is an image from a US article titled "Wall Street prepares for the blue wave Democratic sweep". The Bull market is getting ready to emerge.

Bloomberg carries a graphic showing Biden leading in six Battleground States.

And the headlines are making assumptions:

Of course, we have learned that polls and bookies are unreliable, but it is worth noting that the biggest upsets in polling and bookie history, Brexit and Trump’s 2016 election, were both arguably a shock courtesy of innovative social media campaigns (Cambridge Analytica scandal) that cleverly manipulated wins for the underdogs - possibly/hopefully we have all grown a little bit smarter than that.

The relevance of the Democratic Sweep to you as an investor is summed up by the Financial Times, which carries an article talking about a Biden/Democrats win leading to a more robust economic recovery than expected, fuelled by additional government spending (a big new Democrat-led stimulus package) post-election.

Morgan Stanley also talks this week about an “interest rate scare” and the negative impact a Democrat win would have on the bond market (very good for equities). This chart shows you what Morgan Stanley is worrying about, US bond yields are on the rise with the 10-year bond yield at the highest level since June. An economic recovery, helped by a Democratic sweep and/or a vaccine could double rates from here - it would be 'shocking' - bad for bonds prompting a bonds to equities switch - good for equities.

This rise in bond yields explains the recent equity market strength (our market up 4.5% this week) and we are debating whether this could be the issue that finally, after four months of going sideways, starts the next major uptrend, the next reliable bull market. This is the ASX 200 chart:

The bull market case is working on the following - these are possibly the steps that start a new, more peaceful, less volatile, more reliable, equity market rally:

  • A Democratic Sweep.
  • A bigger and better stimulus package.
  • A new economic optimism.
  • US GDP upgrades.
  • Global GDP upgrades.
  • A peak in unemployment.
  • A rise in inflation.
  • Higher interest rates (Morgan Stanley’s interest rate scare).
  • Bond prices falling.
  • A bond to equities switch.

Throw in a “Trumps gone” relief rally, an end to trade wars and protectionism, collaboration with China and Mexico (who between them account for 19.6% of US exports and 29.6% of US imports), a return to foreign policy with integrity, and a stock-market that doesn’t have to put up with the risk, volatility and unpredictability of midnight tweets and, suddenly, you don’t want to be short the equity market.

Our growth portfolio and our ETF portfolio are both now fully invested.

To listen to this thesis in our daily strategy podcast click here. You can subscribe to the Marcus Today daily strategy podcasts for free on the Apple Podcast App.


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Director
Marcus Today

Marcus Padley founded Marcus Today in 1998 and leads the team of analysts and market commentators that publishes a daily stock market newsletter, presents four podcasts and runs an $80m Australian equity fund. He is passionate about educating and...

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